Emergence of Corporate Governance in India - Part-3

 6.     Dr J J Irani Committee of 2005

Government of India constituted an expert committee under the chairmanship of Dr. J.J Irani the then Director of Tata Sons, on 2 December 2004 , to review and make recommendations on Company Law. The mandate was to make recommendations on (i) responses received from various stakeholders on the concept paper; (ii) issues arising from the revision of the Companies Act, 1956; (iii) bringing about compactness by reducing the size of the Act and removing redundant provisions; (iv) enabling easy and unambiguous interpretation by recasting the provisions of the law; (v) providing greater flexibility in rule making to enable timely response to ever-evolving business models; (vi) protecting the interests of the stakeholders and investors, including small investors; and (vii) Any other issue related, or incidental, to the above.

The major findings included little justification for SOEs being provided relaxations in compliances. They should compete in the market on equal terms. Unfair to investors/creditors if SOEs allowed to present their performance on basis of dissimilar parameters.

Imposition of cost of non-commercial/ commercially unviable social responsibilities should be transparently assessed and provided by the Government through the budget as a subsidy.

There is no rationale for the definition of Government company being extended to companies set up by Government companies in course of their commercial activities.

The main features of its recommendations pertaining to corporate governance are as follows:

 (a) The (new) company law should provide for minimum number of directors necessary for various classes of companies. There need not be any limit to the maximum numbers of directors in a company. This should be decided by the companies or by its Articles of Association. Every company should have at least one director resident in India to ensure availability in case of any issue regarding accountability of the board.

(b) Both the managing director as also the whole time directors should not be appointed for more than five years at a time.

(c) No age limit may be prescribed in the law. There should be adequate disclosure of age of the directors in the company’s document. In case of a public company, appointment of directors beyond a prescribed age (say) seventy years should be subject to a special resolution passed by the shareholders.

(d) A minimum of one-third of the total strength of the board as independent directors should be adequate, irrespective of whether the chairman is executive or non-executive, independent or not. A director to be independent should satisfy certain conditions laid down by the Committee.

(e) The total number of directorships, any one individual may hold, should be limited to a maximum of fifteen.

(f) Companies should adopt remuneration policies that attract and maintain talented and motivated directors and employees for enhanced performance. However, this should be transparent and based on principles that ensure fairness, reasonableness and accountability. There should be a clear relationship between responsibility and performance vis-a-vis remuneration. The policy underlying directors’ remuneration should be articulated, disclosed and understood by investors/stakeholders.

(g) There need not be any limit prescribed to sitting fees payable to non-executive directors including independent directors. The company with the approval of shareholders may decide on remuneration in the form of sitting fees and/or profit related commissions payable to such directors for attending board and committee meetings, and should disclose it in its director’s remuneration report forming part of the annual report of the company.

(h) The requirement of the Companies Act, 1956 to hold a board meeting every three months and at least four meetings in a year should continue. The gap between two board meetings should not exceed four months. Meetings at short notices should be held only to transact emergency business. In such meetings, the mandatory presence of at least one independent director should be required in order to ensure that only well considered decisions are taken. If even one independent director is not present in the emergency meeting, then decisions taken in such meeting should be subject to ratification by at least one independent director.

(i) Majority of the directors of the audit committee should be independent directors if the company is required to appoint independent directors. The chairman of the committee should be independent. At least one member of the audit committee should have knowledge of financial management or audit or accounts. The recommendation of the committee, if overruled by the board should be disclosed in the Directors’ Report along with the reasons for overruling.

(j) There should be an obligation on the board of a public listed company to constitute a remuneration committee, comprising non-executive directors including at least one independent director. The chairman of the committee should be an independent director. The committee will determine the company’s policy as well as specific remuneration packages for its managing/executive directors/senior management.

(k) The rights of minority shareholders should be protected during general meetings of the company. There should be extensive use of postal ballot including electronic media to enable shareholders to participate in meetings. Every company should be permitted to transact any item of business through postal ballot, except the items of ordinary business, viz., consideration of annual accounts, reports of directors and auditors, declaration of dividends, appointment of directors, and appointment and fixation of remuneration of the auditors.

(l) All non-audit services may be pre-approved by audit committee. An audit firm should be prohibited from rendering certain non-audit services as specified by the committee,

(m) Public listed companies should be required to have a regime of internal financial controls for their own observance. Internal controls should be certified by the CEO and the CFO of the company and mentioned in the Directors Report.

(n) Detail of transactions of the company with its holding or subsidiary or associate companies in the ordinary course of business and transacted on an arm’s length basis should be placed periodically before the board through the audit committee. The transactions not in a normal course of business and/or not on an arm’s length justification for the same. A summary of such transaction should form part of the annual report of the company.

(o) Every director should disclose to the company on his directorships and shareholdings in the company and in other companies.

It is important to mention here that despite various recommendations made by the above Committee on corporate governance, the Committee kept silence on two major issues on corporategovernance.

They are:

(i) Chairman and CEO duality (particularly in regard to separation of these two posts), and

(ii) Appointment of nomination committee.

 

 

Companies (Amendment) Act 2006  ushered in an e-governance initiative called “Ministry of Company Affairs in the 21st Century” (MCA-21), a program designed to weed out deadwood within the ministry’s bureaucracy and create a new world of operating efficiency.

Key highlights included:

·         Introduction of a director identification number (DIN), a unique identifier for all existing or future directors, containing personal information.

·         E-filing of almost all events stipulated in the Companies Act, including inspection of documents and annual filing/registration of a company, thereby minimising corruption. Liquidation-related filings excluded.

According to the Ministry, the initiative also means that only 20% of its manpower is needed for paper filing and registration, freeing up its remaining workforce for compliance and enforcement work.

By November 2006, more than 90% of the companies listed on the National Stock Exchange (NSE) and between 60-65% of companies on the Bombay Stock Exchange (BSE) were complying with the revised Clause 49.

SEBI has found innovative methods to try to improve investor protection. In May 2007, it introduced mandatory “corporate governance grading” for all new “Initial Public Offerings (IPO’s)”–the first market in the world to do so. This process includes validation checks (where necessary) with what is heard in the market; plant visits (where required); meetings with company top management, the CEO and independent directors.

International Financial Reporting Standards (IFRS)are high quality, understandable, enforceable and globally acceptable accounting standards issued by International Accounting Standard Board (IASB). India officially decided in 2007 to converge with IFRS. The ICAI and IASB (International Accounting Standard Board) then decided to work together, collaborate and develop quality and comparable accounting standards instead of fully adopting the IFRS standards completely

The year also saw the Institute of Chartered Accountants of India (ICAI) form a committee to create a roadmap for the convergence of Indian accounting standards with International Financial Reporting Standards (IFRS) by 2008.

July 2007, the ICAI Council agreed to fully converge with IFRS standards on or after 1 April 2011, citing the need to take up the matter of convergence with the government and other regulators such as the Reserve Bank of India and SEBI as well as train Indian accountants to effectively adopt and implement IFRS standards.

IFRS is becoming the global language of business with over 40% of the world adopting this as their standard for reporting. India also decided to converge to IFRS from 1st April 2016 in a phased manner, which in turn improves the financial statement comparability and transparency that helps to attract greater cross border investments

 

The Department of Company Affairs had set up “National Foundation for Corporate Governance” (www.nfcgindia.org) in partnership with CII, ICAI, and ICSI. In corporate governance practices, India can be proud of what it has achieved so far, initially voluntarily and later under guidance of various regulators, while recognising that obviously much more needs to be done.

 

The promulgation of Indian Companies Act, 2013, and amendments introduced by the Securities and Exchange Board of India (SEBI) to Clauses 35B and 49 in response in April 2014, has considerably raised the bar for corporate governance inIndian companies. The revised regulations put strong emphasis on internal financial controls, risk management, and Board oversight. The role of the independent director has been further strengthened to make it more objective and purposeful. What is interesting to note is that the requirement for a Board evaluation has been made mandatory for every listed company and other public company with a paid-up capital of Rs 25 crore or more (approximately US$ 4 million).

7.     Guidelines on Corporate Governance for Central Public Sector Undertakings (SOEs) (March 2007)

Public Sector corporate governance reform: Not to be left behind, the Ministry of Heavy Industries & Public Enterprises issued a new code for state enterprises in June 2007, Guidelines on Corporate Governance for Central Public Sector Enterprises.

 

Key areas covered by the guidelines include:

•       Composition of the board of directors;

•       Setting up of audit committees, their roles and powers; issues relating to subsidiaries;

•       Disclosure;

•       Accounting standards; and

•       Risk management.

Approval of Guidelines on Corporate Governance for Central Public Sector Undertakings (SOEs) was made by March 2007 and  applicable for non-listed SOEs. The listed SOEs are required to follow CG guidelines (Clause 49 of Listing Agreement) issued by Securities and Exchange Board of India (SEBI). It covered issues regarding composition of the Board of directors , audit Committee, Subsidiary companies, Disclosures and Compliance. These were to be implemented as soon as possible and within a period of 12 months .

Board of Directors:

 Atleast 1/3 Board to be independent

 Fee to be fixed by Board subject to Government guidelines

 List of information to be made available to Board, provided.

 Director not to be member of more than 10 committees or act as chairman of more than 5 committees

Board to lay down code of conduct for directors and senior management who shall affirm compliance on annual basis. CEO to confirm declaration in Annual Report.

Audit Committee:

 Minimum 3 directors as members. Minimum 2/3 independent directors. Chairman to be independent.

 All members financially literate and atleast 1 accounting or related financial management expert.

 Chairman or his nominee shall attended AGM to answer queries

 Well defined role provided in guidelines

Subsidiary Companies:

 Atleast 1 independent director of holding company shall be on board of subsidiary

 Audit committee of holding to review subsidiary accounts

 Board minutes of subsidiary to be placed before holding board

Disclosures:

 Detailed guidelines provided on disclosures.

Corporate Governance Compliance:

 Annual Report to carry a separate section on CG. List of items to be included provided in guidelines

 A certificate by auditors or company secretary to be obtained, to be placed before members and Parliament

6.      8. SEBI Amendments to Clause 49 of theEquity Listing Agreement April 17, 2014

The Ministry of Corporate Affairs has issued the following circulars on matters related to Corporate Governance clarifying certain provisions of the Companies Act, 2013:

SL NO	Reference	Date	Subject Matter
1	Circular No.14/2014	June 09, 2014	Clarification on rules prescribed under the Companies Act, 2013- matters relating to appointment and qualification of directors and independent directors
2	Circular No.30/2014	July 17, 2014	Clarifications on matters relating to related party transactions
3	Notification	August 14, 2014	Amendment to Company (Meetings of board and its powers) Rules, 2014

  

The revised Clause 49 would be APPLICABLE To ALL LISTED COMPANIES w.e.f. October 01, 2014. 

This amendment  was required for aligning Companies Act 2013 provisions for Corporate Governance aligned with Listing Agreement and also inculcate higher standards of Corporate Governance in listed companies 

The provisions of Clause 49(VI)(C) as given in Part-B shall be applicable to Top 100 listed companies by market capitalization as at the end of the immediate previous financial year.

For other listed entities, the Clause 49 will apply to the extent that it does not violate their respective statutes and guidelines or directives issued by the relevant regulatory authorities. The Clause 49 is not applicable to Mutual Funds.